The former owner of a “We Buy Ugly Houses” franchise admitted in federal court this week that she mislead investors, misused investors’ money, forged investors’ signatures on deeds, and ran what amounted to a real estate Ponzi scheme.
According to the U.S. Attorney’s Office for the District of Colorado, Karen McClaflin pleaded guilty to one count of wire fraud and one count of engaging in a monetary transaction in property derived from wire fraud, stemming from various acts of fraud stretching back to 2005.
Per court documents, McClaflin and a partner opened a franchise of “We Buy Ugly Houses” named Trademark Properties and Trademark Reality in Colorado Springs in 2005.
Trademark’s business involved using investor money to purchase and renovate distressed houses, and then reselling those houses at a profit. But, by 2011, Trademark had run up so much debt that McClaflin’s partner declared bankruptcy and terminated their partnership.
McClaflin chose not to declare bankruptcy herself, rather McClaflin decided to open another company using the same “fix and flip” business model.
That new company was called Homesource Partners and McClaflin took her investors with her from Trademark to Homesource.
McClaflin ran Homesource from late 2010 through early March 2017. During that time, McClaflin told investors that Homesource sought loans to finance the company’s “fix and flip” business because Homesource was not able to use traditional bank loans.
McClaflin told her investors that traditional bank loans took too long and some of the distressed homes she was interested in buying may not qualify as collateral.
Court documents showed that McClaflin told investors that Homesource would seek to buy distressed houses that were deeply discounted, stating that the plan was to purchase the houses for no more than 80% of the “as is” value of the house.
To further entice the investors into buying into the company, McClaflin told the investors that Homesource had “exit strategies” to profit from the distressed houses, including selling the houses within 30 days for an immediate profit, “fixing and flipping” the houses within 31-90 days, or fixing the houses and renting them if the houses failed to sell within 90 days.
McClaflin also told the investors that each of them would be buying a single property, secured by a Deed of Trust in first position on that property, which McClaflin would record on the investor’s behalf.
Occasionally, McClaflin also told investors their Deed of Trust would be in second position.
McClaflin also told investors that they would receive an interest rate of 6% to 15% on their investment.
But, court documents show that many of those claims were untrue.
Beginning in March 2011, McClaflin “knowingly and intentionally” started using several investors’ money to “invest” in the same property and began placing multiple Deeds of Trust on the same properties.
Additionally, in late March or April 2011, McClaflin intentionally chose not to record all of the investors’ Deeds of Trust as she had promised. But McClaflin still falsely represented to the investors that they’d receive a first Deed of Trust.
McClaflin even went so far as to forge the signatures of some investors on a release so McClaflin could remove that investor’s Deed of Trust from a property without the investor’s knowing about it.
McClaflin also occasionally neglected to tell her investors when their property sold and did not return their investment to them as promised.
On top of all of that, at some point in 2013, Homesource’s debt had grown so high and the interest payments owed to investors were so far beyond Homesource’s gross profits, that McClaflin began using new investors’ money to pay off her earlier investors.
According to court documents, an analysis of Homesource’s financial situation showed that the influx of new investor funds kept the company operating, particularly in its latter years. Without that new investor funding, Homesource would have failed years ago, court documents showed.
McClaflin is scheduled to be sentenced on one count of wire fraud and one count of engaging in a monetary transaction in property derived from wire fraud on Jan. 17, 2018.